Fundamentally, We Look Great

While times have producers edgy, things overall look great for the beef industry, three experts say.

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“Schizophrenic” is John Lawrence's description. “Optimistic” is Harlan Ritchie's characterization. Bill Helming calls it “very positive and very solid.” But, all three experts concur that, despite the current challenges posited by a single case of bovine spongiform encephalopathy (BSE), the U.S. beef industry is fundamentally looking good.

“Until Dec. 23, the industry lived in fear of when we would find the first case of BSE in the U.S.,” says Lawrence, an Iowa State University economist. “Now, with heightened BSE surveillance, the worry is if we'll find a second one, and what if we don't get our beef export markets back.”

But Lawrence sees plenty of silver lining and potential, beef demand being a prime example.

“Even if low-carbohydrate diets end up being a fad, the underlying work the industry has done in positioning beef and its role in a healthy diet should sustain beef demand,” Lawrence says.

Another component is the industry's investment in developing more convenient beef items, he adds. About 1,500 such beef products have been developed in the past four years, says the Cattlemen's Beef Board.

“Those are really paying off,” Lawrence says. “They not only give consumers more choices, but that many more products on the retail shelf also give beef more face time with consumers. If the industry hadn't developed those products, our competitors would likely have that space and exposure.”

Lawrence expects Asian markets to be reopened to U.S. beef in 2004. Hopefully, he adds, the resolution will be a long-term one based on sound science. His optimism is based on the fact that Japan was an early adopter of the control of process and standards philosophy espoused by management theorist W. Edwards Deming.

“If the U.S. can show Japan that it has a set of controls and procedures in place that provide the outcome and assurances the Japanese are after, that could be an acceptable and honorable solution for everyone,” Lawrence says.

Ritchie, a Michigan State University distinguished professor of animal science, says the industry's recent advances in meeting consumer demands for convenience and eating experience will serve the industry well. He attributes much of the demand recovery of the past 4½ years, after a 20-year decline, to the development of hundreds of innovative, convenient branded products.

Another positive development is the National Cattlemen's Beef Association-funded National Carcass Merit Project that has enabled breed associations to identify sires and lines of cattle within their respective breeds that are capable of improving beef quality and cutability.

“We are seeing more cooperation and coordination among industry sectors than many of us thought would be possible a few years ago,” Ritchie says. That, along with the growth in consumer adoption of high protein/moderate carbohydrate diets, has helped the beef industry regain the market share usurped by competing proteins, he says.

Ritchie adds that food safety remains a challenge, but technology such as irradiation and other interventions has reduced the incidence of bacterial pathogens such as E. coli O157:H7.

Even more is promised by the adoption of a system of individual animal identification and source verification, he says. “Implementation won't be easy, but such a system will help put us on equal footing with those countries that have already done so,” he says.

One worrisome subject, Ritchie says, is the industry division regarding the mandatory beef checkoff. “Both sides need to work hard at resolving these differences. If not, the industry will be hard pressed to maintain its momentum in the years ahead,” he says.

Despite the industry's current volatility — and potential — Ritchie suggests producers bear in mind that change is a given. “Change is inevitable. It is adaptation and survival that are strictly optional,” he says.

“While it would appear the industry is in an extended period of favorable prices, producers can't afford to let their guard down,” Ritchie says. “In spite of improved margins, it's important that producers and the industry keep production costs in check.”

While Helming, an economist from Lenexa, KS, says there certainly will be short-term gyrations in the beef and related industry markets, the underlying fundamentals point to a bright picture over the next 7-10 years. The very realistic and likely trading range (new price plateau) for fed cattle is $80-100/cwt. for the next 7-10 years, he says.

One driving factor is an eight-year herd liquidation trend that may well continue for several years yet. Here's why:

Calf, feeder cattle and milk prices aren't high enough to encourage building the beef and dairy cow inventory.

Cattle feeders are willing to pay more for heifers as placements than ranchers are to keep them. As a result, many ranchers will continue to take the cash.

On-going drought and poor pasture conditions in key areas of the U.S. continue to shrink cattle numbers in those areas.

Fewer beef and dairy cows are needed due to major productivity gains. Helming says total beef and dairy cattle inventory fell from 132,250,000 head in January 1976 to 94,882,000 head in January 2004, a decline of 28% in 28 years. Yet, the U.S. set an all-time, record-high beef production of 27.1 billion lbs. in 2002.

An aging population of beef and dairy operators is less inclined to take on more risk by expanding their herds.

Federal and state tax laws, such as death taxes and real estate taxes, contribute to operators' decisions not to expand their cattle inventories. Meanwhile, such tax obligations force many operations that can't afford to borrow the money to pay them to sell out or cut back their operations.

And, land-use restrictions. Population growth, particularly in the Southeast, as well as more lucrative uses for land than cattle, continue to shrink cattle numbers in such areas. Meanwhile, in the West, regulatory and activist pressures have made life tougher for ranchers utilizing public lands.

Tight Supplies To Continue

Helming predicts relatively tight beef supplies for the next 3-5 years, possibly longer. A current 30-35% overcapacity in the feeding sector promises to drive further consolidation in the feeding, and also in the packing, sector due to positive economies of scale for larger operations, he says.

Helming estimates feedyards of 10,000- to 35,000-head annual capacity have a cost of operation of about 30-35¢/head day. Meanwhile, 50,000- to 120,000-head-capacity operations run about a dime less.

“That tells you the smaller operators, but not all, will be facing a lot of pressure. There simply won't be enough cattle to go around. Someone is going to have to shut their doors,” Helming says.

In the cow-calf sector, Helming expects some consolidation but not to the degree in the feeding, packing and retail segments. “We'll have fewer, bigger and better managed cow-calf operations, vertically coordinated with other segments further up the value line. Vertical integration isn't a worry; no one wants to own ranches. There's no money in it,” he says.

Regarding beef demand, Helming calls the beef demand upturn, “the most positive underlying fundamental development that has occurred in the history of the beef industry.” The high-protein diet phenomenon, he says, is not a fad. “I'm absolutely convinced it's a trend,” he says.

From a longer-term perspective, Helming says there's more opportunity than there's ever been in terms of the future viability of the U.S. beef industry.

“All these factors are creating a foundation and a climate that will foster more interest, capital and commitment to branded beef and all branded protein. That's particularly true for beef because the industry is so far behind pork and poultry,” Helming says. “Over the next 20 years, we'll see tremendous advances in the branding arena for beef.”

Top 10 Beef Cow States (1,000 Head) Jan. 1, 2004

Texas

5,483

Missouri

2,125

Oklahoma

1,970

Nebraska

1,848

South Dakota

1,711

Kansas

1,550

Montana

1,472

Kentucky

1,128

Tennessee

1,103

Iowa

984

Presidential Elections 2004

Few national elections have managed to sustain the fever of battle through a four-year election cycle, but 2000-2004 seems to be such an exception. An electoral college largely divided along urban and rural lines put George W. Bush in the White House in 2000 and granted a razor-thin majority to Republicans in both houses of Congress.

This November looks to be more of the same as Bush vies for a second term against the likely Democratic nominee, John Kerry. With Congress essentially shackled by a 50-50 party split, the contest for the White House is the most anticipated prize, says Chandler Keys, vice president of government affairs and the chief lobbyist for the National Cattlemen's Beef Association in Washington, D.C.

“Power always travels to where it meets the least resistance. With control of Congress virtually split, which party wins the White House will really be important this year,” he says.

Keys says the Bush Administration has been “very positive” toward the cattle and beef industry.

“We have had a lot of contact with the Bush White House and we share a lot of similar philosophies about markets, demand and the global marketplace. We've gotten along well with them in collaborating to make sure the BSE incident was handled in a way that wasn't hysterical but science and risk based,” Keys says.

Such collaboration also paid dividends in food safety, he adds, where the industry recorded huge progress toward reducing incidence of E. coli O157:H7 and other pathogens.

“We have continued to work together in implementing and fine tuning programs like the Hazard Analysis Critical Control Point (HAACP) program,” Keys says. “We've cooperated to ensure the program is effective at addressing the critical food safety control points and not used for political control points.”

Keys chalks up other significant progress made under the Bush Administration in the areas of federal lands and private lands. And, with the help of committee chairmen assignments in Congress, Keys says, NCBA was successful in garnering a two-year delay in implementation of the country-of-origin-labeling (COOL) law.

“If we hadn't achieved that delay until September 2006, the industry would have to be preparing for that right now, on top of everything else,” he says.

Keys sums up the political situation this way: “At the end of the day, what the industry wants is strong beef demand, a cooperative government, and profitability in the industry. That's what we have now but it takes diligence and fortitude to maintain that.”

A total of eight senators and 29 congressmen, who are either retiring or running for another office, leave a total of 37 seats up for grabs in 2004. But, Keys says one of the most-watched races will be in South Dakota where Democratic Sen. Tom Daschle, the senate's minority leader, is in a tough re-election race against former U.S. Rep. John Thune, a Republican.

“Daschle is a very powerful figure on the political scene, and he has a more populist view of American agriculture. He's a big proponent of COOL and has come out in favor of 100% testing of cattle for BSE. It's likely that if Kerry is elected president that Daschle would be a key advisor on agricultural matters to him,” Keys says. — Joe Roybal